Question

Why the real percent change might be different from the nominal percent change?

Answer 1

What Is Percentage Change?

Percentage change is a simple mathematical concept that represents the degree of change over time. It is used for many purposes in finance, often to represent the price change of a security.

Percentage change can be applied to any quantity that you measure over time. Let's say you are tracking the quoted price of a security. If the price increased, use the formula [(New Price - Old Price)/Old Price] and then multiply that number by 100. If the price decreased, use the formula [(Old Price - New Price)/Old Price] and multiply that number by 100.

This formula is used both to track the prices of individual securities and of large market indexes, as well as comparing the values of different currencies. Balance sheets with comparative financial statements will generally include the prices of specific assets at different points in time along with the percentage changes over the accompanying periods of time.

Nominal GDP uses current prices to place a value on the economy’s production of goods and services. Real GDP uses constant base-year prices to place a value on the economy’s production of goods and services.

Because real GDP is not affected by changes in prices, changes in real GDP reflect only changes in the amounts being produced.

Thus, real GDP is a measure of the economy’s production of goods and services.